We are entering a period during which layoffs and downsizing are dominating the business pages. Firms that just a year ago were riding high with enormous profits (and concomitant bonuses for their top managers) are now retrenching and laying off personnel by the thousands. Many firms in Massachusetts and elsewhere have announced reductions in their workforce.

During the last round of downsizings in the early 1990's, organizational researchers such as Kim Cameron of the University of Michigan found that there were good and bad ways of managing the downsizing process. Our examination of recent reports of downsizing events suggest that we have forgotten those important lessons.

Effective Downsizing

Downsizing is only effective if it is undertaken in the context of repositioning a firm’s strategic direction. For alll firms that face cost control issues, it is essential that if they choose the downsizing route, they have in place a clear strategic focus about where the firm is to focus its attention after the cuts have been made.

As well as the strategic link, the second most important characteristic of a successful downsizing was the fact that top management shared the pain. That is top management took compensation reductions at the same time that they asked for sacrifice from the employees. This doesn’t seem to be the pattern in the firms that I have read about recently.

Finally effective downsizing was coupled with a high level of communication between top management and both those laid off and those who survived. It is especially important that the survivors be told about the place that layoffs play in helping develop the new strategic thrust of the organization. This gives them confidence that top management knows what it is about and that they see how they personally will be making a contribution to this new direction.

Alternatives to Downsizing

In these days of retrenchment, downsizing is not the only way to deal with the problem of reducing costs. In fact, a survey in the 1990's by the Wyatt Company (Best Practices in Corporate Downsizing, 1994) found that only 20% of the firms met their cost cutting goals. It is therefore useful to suggest some alternatives

First, firms where a high proportion of compensation is achieved through bonuses can reduce costs by omitting bonuses from the paycheck. Second, in all firms, staff at all levels throughout the organization – including those at the top – can take a pay cut and a cut in hours until conditions improve. This is far less disruptive both to the firm and to the individuals involved than wholesale layoffs. If a permanent reduction in force is required it can then be achieved through attrition. This is also an economically effective strategy as it does not involve having to make large severance payments to laid off employees. Of course, when all around you are downsizing this is a good time to pick up talented employees to help the firm grow in its new strategic direction..

One thing to do; One to avoid

One other thing: during downsizing, firms will have to invest in training. With a new strategy, staff in declining segments of the business will have to be retrained to be effective in the businesses that the firm is now emphasizing. As people leave through attrition, existing staff will need to be trained to replace them.

And one thing to avoid: buyouts. That is the worst way of downsizing. The most competent people at each level will take the buyout, leaving the less effective behind. This is the last thing a firm needs when it is experiencing business losses.

As we enter another round of reductions in force, layoffs, or downsizings, let us not forget the lessons from the early 1990's: following these best practices can help the economy, the firms involved, and above all their employees.

Sunday, December 21, 2008

I think there are ways to overcome the sticky-wage theory that encourages firms to lay off employees rather than cutting wages (Finding good news in falling prices, New York Times, December 17th, 2008: B1).

If wages and working hour cuts are focused on only one part of the firm such as shop floor employees in a single factory or clerks in a single office then those employees will feel resentment and reduced motivation. However if the cut in hours and wages are shared across the whole organization from the President at the top to the new employee at the bottom then a different dynamic will be invoked: people will see that they are all in this together; that the pain is shared by management and workers; and they will be motivated to work to find ways of improving the firm's performance. That, at least, is the finding of the research on downsizing in the 1990's.

There is much misinformation in Randall Lane's op-ed (A Ballot Buddy System, New York Times, December 15, 2008: A31).

Under current electoral college practices, the purported advantage for small states has vanished. Once large states adopted a "winner take all" system, the electoral college votes of the small states were swamped by the large states.

Mr. Lane fails to point out that his suggested solution, the buddy system, is not a new suggestion. Texas and New York explored the something very similar a few years ago.

Finally, he fails to point to an alternative that has been adopted in several states that does not require a constitutional amendment: commitment by state legislatures to give their electoral votes to the winner of the National Popular Vote. This has been passed into law by four states and is in the process of enactment in many others. This process exploits the fact that the selection of electors is delegated to the states so that when enough states to garner 270 electoral votes pass the law it will come into effect.

As your newspaper has endorsed this procedure, I am surprised that Mr. Lane did not mention it.

Jeff Jacoby has it wrong (Better than a Bailout, Boston Globe, December 14, 2008: K9).

The tax holiday will go they way of the $600 checks we all received in the spring: paying down debt; under the mattress; or into the bank. It will not result in the kind of stimulus the United States economy now needs. There is much wrong with the bailout; it should have gone to make the mortgages whole rather than the purchase of the derivatives. But Congressman Gohmert's plan which Jacoby extols is not the answer. The answer is massive government spending and -- alas -- massive government borrowing in the short term which will mean major tax increases in a few years to pay down the debt.

Monday, December 1, 2008

President-elect Obama says there is no time to be lost to get the stimulus package underway (We are all Keynsians now, Boston Globe, November 25, 2008: A28).

Yet the current administration drags its feet at getting help where it is urgently needed -- unless the needy are the commercial banks. In every state of the union, revenues are falling and Governors are desperately trying to cut expenses and people in order to balance their budgets. In California there is an $11.2 billion shortfall; Michigan has a $2.00 billion shortfall which could skyrocket if the automobile companies collapse; here in Massachusetts we face a similar shortfall. The story is the same in every state and in every city and town which are constitutionally required to balance their budgets.

Why doesn't the Congress pass this part of the stimulus package immediately -- every congress person and every senator comes from an affected state. Why are they waiting?

Delay just exacerbates the situation as we begin to see layoffs among government and municipal workers. These people then file for unemployment benefits and the fiscal gap for the states and cities widens.

Of course, there are some creative ways of avoiding layoffs like everyone (from Governor and Mayor on down) in state and city taking a temporary wage cut until economic conditions improve. But I have not seen these mentioned in any of the suggested plans. Why not?